Fundamental Analysis of Elecon Engineering Company: The stock of Elecon Engineering Company has generated a whopping return of 1,000% in the last five years for its investors.

With the CAPEX cycle underway and the government’s huge budget outlay and ‘Make in India’ initiative, the investors are still bullish on this industrial equipment manufacturer. In this article, we’ll perform a fundamental analysis of Elecon Engineering Company and attempt to know if it can be a good investment pick.

Fundamental Analysis of Elecon Engineering Company

Elecon Engineering Company Logo

We shall start our analysis with an overview of the business and products of Elecon Engineering followed by a brief description of its revenue segments. Later, we race through the financials of the stock. A highlight of the future plans and a summary conclude the article at the end.

telegram channel

Company Overview

Started more than 70 years ago in 1951, Elecon Engineering Ltd. is a small-cap industrial and mechanical engineering company with a market value of Rs 8,440 crore. It is India’s largest and one of Asia’s largest industrial gear manufacturers.

Note: If you want to learn Candlesticks and Chart Trading from Scratch, here’s the best book available on Amazon! Get the book now!

It manufactures a wide variety of industrial geared motors & reducers, material handling equipment, casting processes, mining equipment, and more. These products find their end applications in ships, wind turbines, steel plants, ports, mining, defence, aerospace, and more.

Despite being small in size, Elecon has a well-diversified base of operations. It has a strong network of distributors & dealers with more than 60 and 100 in India and overseas locations respectively.

Furthermore, the equipment manufacturer has a large facility of 335,000 square meters in India supported by 4 assembly centres across the world. These along with 10 sales offices aid the company to cater to its customers in 75+ nations globally.

Fundamental Analysis of Elecon Engineering Company - Geographical report
Source: Elecon Engineering Ltd. Investor Presentation

Broadly, the company organises its operations in two segments: power transmission products and material handling equipment. Let us now learn about the revenue segments for our fundamental analysis of Elecon Engineering.

Product-wise segment share

The company earned a majority of 86% of its FY23 revenue from power transmission products while the balance 14% came from material handling equipment sales. 

The power transmission division’s EBIT contribution to the company’s total EBIT stood at 90%. This tells us that both divisions run at similar EBIT margins at least at this stage.

Geographical segment share

As for the diversity in the sources of revenue, Elecon Engineering generated 71% of its sales from its customers within the country. Overseas sales accounted for 29% of the total income of the equipment manufacturer in FY23.

Industry Overview

We read above about the business of Elecon Engineering and how its products are used in multiple sectors from construction to mining to ports and more. Thus, its growth remains broad-based making it a cyclical stock which closely follows the economic growth.

According to the Reserve Bank of India, the GDP of India is projected to expand by 6.5% in FY24 even as the world GDP growth is expected to fall to 2.8% in 2023. A variety of initiatives from the Central Government will directly boost the growth of various sectors of the economy.

To start with, the Center has earmarked a large capital expenditure of Rs 10 lakh crore to boost development and infrastructure in the country. As part of this, it has launched multiple projects within each sector such as high-speed trains, rural electrification, highway development, airports development, logistics improvement, and more.

Furthermore, the ‘Make in India’ initiative and the associated production-linked incentives will bring volume growth for various domestic equipment manufacturers like Elecon in the coming years.

Going forward, all these factors are expected to bring higher order inflows for equipment manufacturers on the back of steady capacity expansion in power, steel, mining, infrastructure, and other sectors.

Elecon Engineering Company – Financials

Revenue and Net Profit Growth

Elecon Engineering earned a profit after tax of Rs 237 crore on the operating revenue of Rs 1,530 crore in FY23. Its top line and bottom line remained volatile during the FY 2019 to FY 2021 period with the last two fiscals exhibiting strong growth.

The figures below represent the revenue and net profit of Elecon Engineering Company over the previous five financial years.

Fiscal YearOperating RevenueNet Profit
20231,530237
20221,212140
20211,04558
20201,08890
20191,22370

(figures in Rs Cr)

How is it that profits grew multifold while sales scaled at a slower pace? We answer this question in the next section on profit margins of our fundamental analysis of Elecon Engineering.

Profit Margins

In the last two years, the margins of the equipment manufacturer considerably improved as the product mix changed towards the gear business and a higher focus on profitable products in material handling equipment.

As a result, the EBITDA margin improved from 11.4% in FY19 to 22.2% in FY23. The net profit margin stood at 15.5% in the recent financial year from only 5.7% five years ago.

The table below highlights the EBITDA margin and net profit margin of Elecon Engineering Company for the few fiscal years.

Fiscal YearEBITDA MarginNet Profit Margin
202322.215.5
202220.311.6
202117.85.5
202012.98.2
201911.45.7

(figures in %)

Return Ratios

The higher profits directly boosted the profitability of Elecon Engineering taking its return ratios: return on capital employed (RoCE) and return on equity (RoE) to their highs of 22.8% and 18.8% respectively during our study period.

The table below showcases how the two return ratios: RoCE and RoE have performed over the previous few fiscals.

Fiscal YearRoCERoE
202322.818.8
202216.913.6
202111.36.4
20207.010.8
20190.59.40

(figures in %)

Debt Analysis

Moving on to the debt analysis, we can say for sure that Elecon’s management did a fine job of paying back debt to make the company debt free as it earned higher profits. Elecon Engineering is now a debt-free stock with a negligible debt/equity ratio of 0.05 and high-interest coverage of 27 times.

The table below brings forward the reduction in the debt and rise in interest coverage of Elecon Engineering over the past few years.

Fiscal YearDebt / EquityInterest Coverage
20230.0527.0
20220.146.8
20210.362.3
20200.541.2
20190.712.2

Future Plans Of Elecon Engineering Company

So far we looked at the previous fiscals data for our fundamental analysis of Elecon Engineering. Let us try to get some sense of what lies ahead for the company and its investors.

  1. Elecon’s power transmission division had orders in hand worth Rs 569 crore at the end of FY23, 1/3rd of its full fiscal revenue highlighting revenue consistency.
  2. Similarly, its material handling equipment had Rs 145 crore worth of order book, 1/10 of the FY23 revenue.
  3. The management has guided for a revenue figure of Rs 1,700 crore for the FY24 period for its gears business.
  4. Furthermore, the company is optimistic about the new products in the pipeline and demand from European OEMs.

Key Metrics

We are almost at the end of our fundamental analysis of Elecon Engineering Company. Let us take a quick look at the key metrics of the stock.

ParticularsAmountParticularsAmount
CMP ₹849Market Cap (Cr.)₹9,316
EPS₹24Stock P/E34.9
RoE19%RoCE23%
Promoter Holding59%Book Value₹114
Debt to Equity0.1Price to Book Value6.47
Net Profit Margin15.5%EBITDA Margin22.2%

Conclusion

As we conclude our fundamental analysis of Elecon Engineering Company, we can say the stock delivered returns as the underlying business improved. Even with a steep rise behind, the prospects still hold strong with a higher CAPEX cycle at play. However, investors should closely track quarterly results to spot any decline in order growth, signalling lower earnings in future.

Overall, what is your take on engineering companies like Elecon? What is your investment horizon for such stocks? How about we continue this conversation in the comments below?

Written By Vikalp Mishra

By utilizing the stock screener, stock heatmap, portfolio backtesting, and stock compare tool on the Trade Brains portal, investors gain access to comprehensive tools that enable them to identify the best stocks also get updated with stock market news, and make well-informed investment decisions.


Start Your Stock Market Journey Today!

Want to learn Stock Market trading and Investing? Make sure to check out exclusive Stock Market courses by FinGrad, the learning initiative by Trade Brains. You can enroll in FREE courses and webinars available on FinGrad today and get ahead in your trading career. Join now!!